Q&A Hero

Q: _______________ is the process of transferring journal entry information to the ledger.

Q: Stride Rite had total liabilities of $130 million and total assets of $375 million. Its debt ratio was _______________.

Q: FastForward purchased $25,000 of equipment for cash. The Equipment asset account is _______________ for $25,000 and the cash account is _______________ for $25,000.

Q: Increases in assets are _______________, while increases in liabilities are _______________.

Q: The difference between total debits and total credits for an account, including any beginning balance, is the ________________________.

Q: _____________________________ requires that the impact of each transaction be recorded in at least two accounts. It also means that total amounts debited must equal total amounts credited for each transaction.

Q: A ___________________ is a record containing all accounts for a company along with their balances.

Q: A _______________ is a list of all the accounts used by a company and their identification codes.

Q: Unearned revenue is classified as _______________ that is satisfied by delivering products or services in the future.

Q: ___________________ is a promise of payment from customers to sellers.

Q: The three general categories of accounts in a general ledger are __________________, _________________ and __________________________.

Q: The _______________________ is a record containing all accounts (with balances) used by a company.

Q: _________________ identify and describe transactions and events and provide objective evidence and amounts for recording.

Q: The third step in the analyzing and recording process is to post the information to _________________________.

Q: The second step in the analyzing and recording process is to record the transactions and events in the _____________________________.

Q: Based on the following trial balance for Sal's Beauty Shop, prepare an income statement, statement of retained earnings and a balance sheet. Sal made no additional investments in the company during the year. SALS BEAUTY SHOP Trial Balance December 31 Cash $ 6,500 Accounts receivable 475 Beauty supplies 2,500 Beauty shop equipment 17,000 Accounts payable $ 745 Common stock 10,000 Retained earnings 11,155 Dividends 36,000 Revenue earned 72,000 Beauty supplies expense 3,425 Rent expense 6,000 Wages expense 22,000 Totals $93,900 $93,900

Q: A company is considering two projects, Project A and Project B. The following information is available for each project: Project A Project B Investment........................................... $2,000,000............................ $500,000 Net present value of cash flows $800,000 $300,000 Calculate the profitability index for each project. Based on the profitability index, which project should the company pursue and why?

Q: A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year. If a table of present values of 1 at 12% shows values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the cash flows from the investment, discounted at 12%?

Q: A company purchases a machine for $1,000,000. The machine has an expected life of 9 years and no salvage value. The company anticipates a yearly net income of $60,000 after taxes of 30% to be received uniformly throughout each year. What is the accounting rate of return?

Q: A company is evaluating the purchase of a machine for $900,000 with a six-year useful life and no salvage value. The company uses straight-line depreciation and it assumes that the annual net cash flow from using the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is the company's average investment?

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Q: A company is trying to decide which of two new product lines to introduce in the coming year. The predicted revenue and cost data for each product line follows: Product A Product B Sales............................................................ $80,000 $96,000 Direct materials............................................................ 3,000 6,000 Direct labor............................................................ 30,000 45,000 Other cash operating expenses............................................................ 7,500 9,000 New equipment costs............................................................ 75,000 100,000 Estimated useful life (no salvage)............................................................ 5 years 5 years The company has a 30% tax rate, it uses the straight-line depreciation method, and it predicts that cash flows will be spread evenly throughout each year. Calculate each product's payback period. If the company requires a payback period of three years or less, which, if either, product should be chosen?

Q: A company is considering purchasing a machine for $75,000. The machine is expected to generate a net after-tax income of $11,250 per year. Depreciation expense would be $7,500. What is the payback period for this machine?

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Q: A company must decide between scrapping or rebuilding units that do not pass inspection. The company has 15,000 such units that cost $6 per unit to manufacture. The units were built to satisfy a special order, which must still be satisfied if the defective units are scrapped. The units can be sold as scrap for $2.50 each or they can be reworked for $4.50 each and sold for the full price of $9.00 each. If the units are sold as scrap, the company will have to build 15,000 replacement units and sell them at the full price. Required: (1) What is the net return from selling the units as scrap? (2) What is the net return from reworking and selling the units? (3) Should the company sell the units as scrap or rework them?

Q: A company is planning to introduce a new portable TV to its existing product line. Management must decide whether to make the TV case or buy it from an outside supplier. The lowest outside price is $100. If the case is produced internally, the company will have to purchase new equipment that will yield annual depreciation of $130,000. The company will also need to rent a new production facility at $200,000 a year. At 20,000 cases per year, a preliminary analysis of production costs shows the following: Per Case Direct materials.......................................................... .............................................. $ 40.00 Direct labor.......................................................... ............................................... 32.00 Variable overhead.......................................................... ............................................... 10.00 Equipment depreciation.......................................................... ............................................... 6.50 Building rental .......................................................... ............................................... 10.00 Allocated fixed overhead.......................................................... .............................................. 7.50 Total cost.......................................................... ............................................. $106.00 Required: (1) Determine whether the company should make the cases or buy them from the outside supplier. (2) What decision should be made if only 15,000 cases are needed? (3) What other factors, besides cost, should the company consider?

Q: Peters, Inc. sells a single product and reports the following results from sales of 100,000 units: Sales ($45 unit) ... $4,500,000 Less costs and expenses: Direct materials ($16/unit). $1,600,000 Direct labor ($9/unit).. 900,000 Variable overhead ($3/unit)... 300,000 Fixed overhead ($8.10/unit).......... 810,000 Variable administrative ($4.50/unit). 450,000 Fixed administrative ($4/unit)... 400,000 Total costs and expenses... $(4,460,000) Operating income $ 40,000 A foreign company wants to purchase 15,000 units. However, they are willing to pay only $36 per unit for this one-time order. They also agree to pay all freight costs. To fill the order, Peters will incur normal production costs. Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance. No additional administrative costs (variable or fixed) will be incurred in association with this special order. Required: (1) Should Peters accept the order if it does not affect regular sales? Explain. (2) Assume that Peters can accept the special order only by giving up 5,000 units of its normal sales. Should Peters accept the special order under these circumstances?

Q: Jorgensen Department Store has three departments: Clothing, Toys, and Jewelry. The most recent income statement, showing the total operating profit and departmental results is shown below: Total Clothing Toys Hardware Sales......................................... $2,100,000 $1,000,000 $600,000 $500,000 Cost of goods sold......................................... (1,260,000) (500,000) (400,000) (360,000) Gross profit......................................... 840,000 500,000 200,000 140,000 Direct expenses......................................... (420,000) (200,000) (100,000) (120,000) Allocated expenses......................................... (350,000) (100,000) (75,000) (175,000) Net income (loss)......................................... $ 70,000 $ 200,000 $ 25,000 $(155,000) Based on this income statement, management is planning on eliminating the hardware department, as it is generating a net loss. If the hardware department is eliminated, the toy department will expand to fill the space, but sales will not change in total, nor will direct expenses. None of the allocated expenses will be avoided, but they will be reallocated. Clothing will be allocated $200,000 of these expenses, and Toys will be allocated $150,000 of these expenses. Prepare a new income statement for Jorgensen Department Store, showing the results if the Hardware Department is eliminated. Should the Hardware Department be eliminated?

Q: A company has just received a special, one-time order for 1,000 units. Producing the order will have no effect on the production and sales of other units. The buyer's name will be stamped on each unit, at a total cost of $2,000. Normal cost data, excluding stamping, follows: Direct materials $ 10 per unit Direct labor.. 16 per unit Variable overhead 4 per unit Allocated fixed overhead. 12 per unit Allocated fixed selling expense 8 per unit What selling price per unit will this company require to earn $3,000 on the order?

Q: Fleming Company had the following results of operations for the past year: Sales (10,000 units at $6.80).......................................... $ 68,000 Materials and direct labor.......................................... (20,000) Overhead (40% variable).......................................... (10,000) Selling and administrative expenses (all fixed) (6,000) Operating income.......................................... $ 32,000 A foreign company (whose sales will not affect Fleming's regular sales) offers to buy 2,000 units at $5.00 per unit. In addition to variable manufacturing costs, there would be shipping costs of $1,200 in total on these units. Should Fleming take this order? Explain.

Q: A company inadvertently produced 6,000 defective portable CD players. The CD players cost $20 each to be manufactured. A salvage company will purchase the defective units as they are for $16 each. The production manager reports that the defects can be corrected for $9 per unit, enabling the company to sell them at the regular price of $30.00. The repair operations would not affect other production operations. Prepare an analysis that shows which action should be taken.

Q: For each of the capital budgeting methods listed below, place an X in the correct column, indicating the measurement basis of each, the ability to make comparison among projects, and whether each method reflects or ignores the time value of money. Measurement Basis Comparison among projects Time value of money Cash flows Accrual income Allows comparison Difficult to compare Reflects time value of money Ignores time value of money Payback period Accounting rate of return Net present value _ Internal rate of return

Q: Identify at least three reasons for managers to favor the internal rate of return (IRR) over other capital budgeting approaches.

Q: You have evaluated three projects using the net present value (NPV) method. How would you decide which one of the projects to select?

Q: What is one advantage and one disadvantage of using the accounting rate of return to evaluate investment alternatives?

Q: When making capital budgeting decisions, companies usually prefer shorter payback periods. Explain why shorter payback periods are desirable.

Q: Briefly describe both the payback period method and the net present value method of comparing investment alternatives.

Q: How does the calculation of break-even time (BET) differ from the calculation of payback period (PBP)?

Q: Good management accounting indicates that projects be evaluated using relevant data. In choosing among alternatives, what factors (considerations) are relevant?

Q: In using the internal rate of return method, management must consider a hurdle rate in making its decisions. What is a hurdle rate? What factors does management have to consider in selecting a hurdle rate?

Q: Briefly describe the time value of money. Why is the time value of money important in capital budgeting?

Q: What is capital budgeting? Why are capital budgeting decisions often difficult and risky?

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Q: Presented below are terms preceded by letters a through g and followed by a list of definitions 1 through 7. Match the letter of the term with the definition. Use the space provided preceding each definition. (a) Net Present Value (b) Capital Budgeting (c) Accounting Rate of Return (d) Net Cash Flow (e) Internal Rate of Return (f) Payback Period (g) Hurdle Rate ______ (1) A discount rate that results in a net present value of zero. ______ (2) Cash inflows minus cash outflows for the period. ______ (3) A minimum acceptable rate of return. ______ (4) The time expected to pass before the net cash flows from an investment equals its initial cost. ______ (5) Annual after-tax net income divided by annual average investment. ______ (6) A process of analyzing alternative long-term investments. ______ (7) Initial cost of an investment subtracted from discounted future cash flows from the investment.

Q: A machine costs $180,000 and is expected to yield an after-tax net income of $10,800 each year. Management estimates the machine will have a ten-year life, a $20,000 salvage value, and straight-line depreciation is used. Compute the accounting rate of return for the investment. A. 12.0%. B. 26.8%. C. 11.8%. D. 10.8%. E. 28.8%.

Q: Eagle Company is considering the purchase of an asset for $100,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year. Compute the payback period for this investment. (Round to two decimal places.) Annual Net Cash Flows Year 1 $40,000 Year 2 $40,000 Year 3 $35,000 Year 4 $35,000 Year 5 $30,000 A. 2.85 years. B. 2.57 years. C. 3.00 years. D. 2.50 years. E. 3.62 years.

Q: A new manufacturing machine is expected to cost $286,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the accounting rate of return for the investment. A. 22.2%. B. 23.4%. C. 46.9%. D. 12.2%. E. 24.5%.

Q: A new manufacturing machine is expected to cost $286,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the payback period for the purchase. A. 8.7 years. B. 3.8 years. C. 4.3 years. D. 7.3 years. E. 5.4 years.

Q: Sherman Company can sell all of its products A and Z that it can produce, but it has limited production capacity. It can produce 6 units of A per hour or 10 units of Z per hour, and it has 20,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for this company? A. 84,000 units of A and 60,000 units of Z. B. 48,000 units of A and 80,000 units of Z. C. 60,000 units of A and 100,000 units of Z. D. 120,000 units of A and 0 units of Z. E. 0 units of A and 200,000 units of Z.

Q: Selling price per unit.......................................................... $ 17.00 Variable costs per unit Direct materials and direct labor .......................................................... $ 10.00 ($200,000/20,000 units) Variable overhead .......................................................... [(40% * $100,000)/20,000 units] Total variable costs per unit.......................................................... ) Contribution margin per unit.......................................................... $ 5.00 Units in order.......................................................... Total contribution margin.......................................................... Less incremental fixed costs: Overhead.......................................................... $ 500 Selling and administrative.......................................................... Total incremental fixed costs.......................................................... ) Incremental income from order..........................................................

Q: Trescott Company had the following results of operations for the past year: Sales (20,000 units at $22)...................................................... $440,000 Direct materials and direct labor...................................................... $200,000 Overhead (40% variable)...................................................... 100,000 Selling and administrative expenses (all fixed)...................................................... 92,000 (392,000 ) Operating income...................................................... $ 48,000 A foreign company (whose sales will not affect Trescotts market) offers to buy 3,000 units at $17.00 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000. If Trescott accepts the offer, its profits will: A. Decrease by $4,500. B. Increase by $4,500. C. Decrease by $300. D. Increase by $13,500. E. Increase by $15,000.

Q: Barnes manufactures a specialty food product that can currently be sold for $22 per unit and has 20,000 units on hand. Alternatively, it can be further processed at a cost of $12,000 and converted into 12,000 units of Exceptional and 6,000 units of Premium. The selling price of Exceptional and Premium are $30 and $20, respectively. The incremental net income of processing further would be: A. $40,000. B. $28,000. C. $18,000. D. $44,000. E. $12,000.

Q: Axle Company can produce a product that incurs the following costs per unit: direct materials, $10; direct labor, $24, and overhead, $16. An outside supplier has offered to sell the product to Axle for $45. If Axle buys from the supplier, it will still incur 45% of its overhead cost. Compute the net incremental cost or savings of buying. A. $4.00 savings per unit. B. $4.00 cost per unit. C. $2.20 cost per unit. D. $3.80 cost per unit. E. $2.20 savings per unit.

Q: A company is considering a 5-year project. The company plans to invest $60,000 now and it forecasts cash flows for each year of $16,200. The company requires a hurdle rate of 12%. Calculate the internal rate of return to determine whether it should accept this project. Selected factors for a present value of an annuity of 1 for five years are shown below: Interest rate Present value of an annuity of 1 factor 10% 3.7908 12% 3.6048 14% 3.4331 A. The project should be accepted. B. The project should be rejected because it earns more than 10%. C. The project earns more than 10% but less than 12%. If the hurdle rate is 12%, the project should be rejected. D. Only 9% is acceptable. E. Only 10% is acceptable.

Q: A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year. If a table of present values of 1 at 12% shows values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the cash flows from the investment, discounted at 12%? A. $ 118,855 B. $ 583,676 C. $ 629,788 D. $ 705,391 E. $1,918,855

Q: Machine B: Net cash Present value Present value of Year 1 ........................................ $1,000 8696 $ 870 Year 2 ........................................ 2,000 0.7561 1,512 Year 3 ........................................ 11,000 0.6575 Total........................................ $ 9,614 Initial investment........................................ ) Net present value........................................

Q: Machine A: Net cash Present value Present value of Year 1 ........................................ $5,000 8696 $ 4,348 Year 2 ........................................ 4,000 0.7561 3,024 Year 3 ........................................ 2,000 0.6575 Total........................................ $ 8,687 Initial investment........................................ ) Net present value........................................

Q: 1.................. $5,000 $1,000 2................. 4,000 2,000 3................. 2,000 11,000 Saxon Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return on its investments. The present value factors of 1 at 15% are: 1 year, 0.8696; 2 years, 0.7561; 3 years, 0.6575. Which machine should Saxon purchase? A. Only Machine A is acceptable. B. Only Machine B is acceptable. C. Both machines are acceptable, but A should be selected because it has the greater net present value. D. Both machines are acceptable, but B should be selected because it has the greater net present value. E. Neither machine is acceptable.

Q: Saxon Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash flows as follows: End of Machine

Q: Feedback: Net cash Present value Present value of Years 1 3 ........................................ $12,000 5771 $30,925 Year 4........................................ 16,000 0.7350 Total........................................ $42,685 Initial investment........................................ ) Net present value........................................

Q: Periods Present Value Present Value of an of 1 at 8% Annuity of 1 at 8% 1.................... 0.9259 0.9259 2.................... 0.8573 1.7833 3.................... 0.7938 2.5771 4.................... 0.7350 3.3121 Norman Co. wants to purchase a machine for $40,000, but needs to earn an 8% return. The expected year-end net cash flows are $12,000 in each of the first three years, and $16,000 in the fourth year. What is the machine's net present value (round to the nearest whole dollar)? A. $(9,075). B. $2,685. C. $42,685. D. $(28,240). E. $52,000.

Q: The hurdle rate is often set at: A. The rate the company could earn if the investment were placed in the bank. B. The company's cost of capital. C. 10% above the IRR of current projects. D. 10% above the ARR of current projects. E. The rate at which the company is taxed on income.

Q: Which one of the following methods considers the time value of money in evaluating alternative capital expenditures? A. Accounting rate of return. B. Net present value. C. Payback period. D. Cash flow method. E. Return on average investment.

Q: Which of the following cash flows is not considered when using the net present value method? A. Future cash inflows. B. Future cash outflows. C. Past cash outflows. D. Non-uniform cash inflows. E. Future cash flows.

Q: An estimate of an asset's value to the company, calculated by discounting the future cash flows from the investment at an appropriate rate and then subtracting the initial cost of the investment, is known as: A. Annual net cash flows. B. Rate of return on investment. C. Net present value. D. Payback period. E. Unamortized carrying value.

Q: The following data concerns a proposed equipment purchase: Cost............................................................. ............................................................. .............................................. $144,000 Salvage value............................................................. ............................................................. .............................................. $ 4,000 Estimated useful life ............................................................. ............................................................. .............................................. 4 years Annual net cash flows............................................................. ............................................................. .............................................. $ 46,100 Depreciation method............................................................. .................................. Straight-line Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is: A. 62.3%. B. 32.0%. C. 15.0%. D. 7.7%. E. 5.0%.

Q: The accounting rate of return is calculated as: A. The after-tax income divided by the total investment. B. The after-tax income divided by the annual average investment. C. The cash flows divided by the annual average investment. D. The cash flows divided by the total investment. E. The annual average investment divided by the after-tax income.

Q: Beyer Corporation is considering buying a machine for $25,000. Its estimated useful life is 5 years, with no salvage value. Beyer anticipates annual net income after taxes of $1,500 from the new machine. What is the accounting rate of return assuming that Beyer uses straight-line depreciation and that income is earned uniformly throughout each year? A. 6.0%. B. 8.0%. C. 8.5%. D. 10.0%. E. 12.0%.

Q: Monterey Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value. Monterey uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Monterey's average investment? A. $ 6,000. B. $ 7,000. C. $18,000. D. $21,000. E. $36,000.

Q: A company buys a machine for $60,000 that has an expected life of 9 years and no salvage value. The company anticipates a yearly net income of $2,850 after taxes of 30%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return? A. 2.85%. B. 4.75%. C. 6.65%. D. 9.50%. E. 42.75%.

Q: After-tax net income divided by the annual average investment in an investment, is the: A. Net present value rate. B. Payback rate. C. Accounting rate of return. D. Earnings from investment. E. Profit rate.

Q: A disadvantage of using the payback period to compare investment alternatives is that: A. It ignores cash flows beyond the payback period. B. It includes the time value of money. C. It cannot be used when cash flows are not uniform. D. It cannot be used if a company records depreciation. E. It cannot be used to compare investments with different initial investments.

Q: A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash inflows from this investment are $36,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4) and $6,000 (year 5). The payback period is: A. 4.50 years. B. 4.25 years. C. 3.50 years. D. 3.00 years. E. 2.50 years.

Q: A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. What is the payback period for the new machine? A. 4 years. B. 6 years. C. 10.5 years. D. 14 years. E. 42 years.

Q: The time expected to pass before the net cash flows from an investment would return its initial cost is called the: A. Amortization period. B. Payback period. C. Interest period. D. Budgeting period. E. Discounted cash flow period.

Q: Coffer Co. is analyzing two projects for the future. Assume that only one project can be selected. Project X Project Y Cost of machine $68,000 $60,000 Net cash flow: Year 1 24,000 4,000 Year 2 24,000 26,000 Year 3 24,000 26,000 Year 4 0 20,000 If the company is using the payback period method and it requires a payback of three years or less, which project should be selected? A. Project Y. B. Project X. C. Both X and Y are acceptable projects. D. Neither X nor Y is an acceptable project. E. Project Y because it has a lower initial investment.

Q: The calculation of the payback period for an investment when net cash flow is even (equal) is: A. Cost of investment/Annual net cash flow B. Cost of investment/Total net cash flow C. Annual net cash flow/Cost of investment D. Total net cash flow/Cost of investment E. Total net cash flow/Annual net cash flow

Q: The break-even time (BET) method is a variation of the: A. Payback method. B. Internal rate of return method. C. Accounting rate of return method. D. Net present value method. E. Present value method.

Q: Thompson Company had the following results of operations for the past year: Sales (16,000 units at $10).............................................. $160,000 Direct materials and direct labor.............................................. $96,000 Overhead (20% variable).............................................. 16,000 Selling and administrative expenses (all fixed) 32,000 (144,000) Operating income.............................................. $ 16,000 A foreign company (whose sales will not affect Thompson's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300. If Thompson accepts the offer, its profits will: A. Increase by $30,000. B. Increase by $ 6,000. C. Decrease by $ 6,000. D. Increase by $ 5,200. E. Increase by $ 4,300.

Q: A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. What should the company do? A. Sell the units as scrap. B. Rebuild the units. C. It does not matter because both alternatives have the same result. D. Neither sell nor rebuild because both alternatives produce a loss. Instead, the company should store the units permanently. E. Throw the units away.